Last year a group of MFin students did a consulting project for a specialist energy investment firm, comparing the investment prospects for solar and wind power in China and India. They were very negative about the outlook for China, on the back of excess capacity and some quality problems with wind turbines. The client was happy and I hope took their advice.
Because the Chinese solar power sector is in a real mess. One of the largest companies, Suntech, which is quoted in the US, is looking to renegotiate $541m of convertible debt due in March. Its total debt is $2.3bn. And its market capitalisation is just $163m. Net debt to EBITDA is 23 times (source: Bloomberg).
Several other Chinese solar companies are also in trouble. Why? Huge overcapacity owing to a mixture of easy loans from state banks and a general over-enthusiasm to invest in what seen as an exciting sector. Solar panel prices have collapsed globally on the over-capacity. A recent article from the New York Times quotes Mr. Li Junfeng, a senior figure at the National Development and Reform Commission, saying that China needs to cut two thirds of its capacity to allow the remaining third to be profitable.
But this is unlikely to happen because the government is trying to keep the economy from decelerating and the banks don’t want to recognise the loans as bad. You can read further comment on this subject from the Beijing-based US economist Patrick Chovanec, whose excellent blog I read.
The Chinese economy as a whole is unbalanced, in particular by the excessive amount of investment as a share of GDP compared with consumption. This is widely acknowledged and government policy is to correct these imbalances during the current five year plan. But it’s hard to make progress when there are so many forces encouraging not only new investment but the refusal to recognise wasteful investment in the past.
Those western commentators who seem to think that the Chinese economic planning authorities can do no wrong might like to look at this example of how the system doesn’t always work well.